The Value Relevance of Operating Lease Liabilities: Economic Effects of IFRS 16

Abstract

AbstractThe new IASB and FASB models for leases aim to improve the quality of financial reporting. To this end, both standard setters impose the recognition of assets and liabilities for operating leases. Meanwhile, preparers have been strongly lobbying against these changes, as in their view the new treatment will lead to negative economic consequences. We undertake a value‐relevance study to examine whether as‐if capitalised operating leases are priced by market users in a relatively unexplored setting. We consider Spanish listed firms, and employ hand‐collected data on operating leases disclosed in the notes to the financial statements to constructively capitalise the assets and liabilities. Our analysis suggests that investors in code‐law countries with less developed markets and low enforcement quality do not behave any differently to those in common‐law countries that have more developed markets and stricter enforcement policies. Investors equally value recognised debts and operating lease liabilities resulting from information in the notes in retail sectors. In our view, these results could provide some comfort to managers in the most affected industries, as they suggest the change will not have a major impact on the stock exchange.